I'm not sure where I fall on what a real-estate agent's cut should be for selling a house. But for the buyer's agent, it's really over-valued IMO. And why should a buyer's agent in San Jose make 4x more than somebody in Des Moines for the exact same value-add?
When I bought my house, my Realtor found some good listings, arranged viewings, did the paperwork, and set everything up for me. All useful services, and worth paying for. But was it worth $12k for less than 40 hours of total work? I don't think so. That's a higher hourly rate than I'd be charged by a good doctor. And my house was a pretty cheap one by modern standards. Those are monopoly prices charged by people who know they've got you over a barrel.
A lot depends on the realtor.
One realtor I know not only does everything you mention, but also gives their clients lots of advice (based on many decades of experience in the industry) -- for instance, telling them if the prices they're setting on their home or bidding for are likely too high or too low, or what to do with a house in order to make it more likely to be sold. How much is such advice worth -- advice that could get them the house they're dreaming of or sell the house they desperately need to sell?
They also explain everything related to real-estate in great detail, tell them about the neighborhoods they're considering, drive them around all over the place (paying for their own gas, car, maintenance and insurance), sit in with them during the closing to go over the entire contract with them and explain everything and make sure they're not getting screwed. For sellers, the agent provides free advertising, spends a ton of time sitting at open houses waiting for people to show up and then showing them around, and trying to sell them the home, etc, etc. They negotiate deals and are the buyer's or seller's representative to the other party.
All this work is done for free unless the house is sold.
Again and again, I've heard how clients take months and months of this work done for free and then switch to go to another agent, paying the agent not a single dime for all the time they spent working for them. Or they'll just change their mind and no longer want to buy or sell.
I've heard so many horror stories from them: clients are often incredibly inconsiderate, calling at all hours of the night and on weekends (this is not a 9-5 job), expecting them to work when sick, or just being super abrasive assholes or liars. Personally, I would never put up with any of that, but agents have to make ends meet, so are often forced to work with those kinds of people or starve.
Watch the movie Glengarry Glen Ross sometime. The life of a typical real estate agent really is that bad, or worse.
Real estate agents also risk their own lives doing their jobs: they routinely go alone in to empty houses with complete strangers. It's not common, but real estate agents have been assaulted, raped, or killed while showing homes. How many people think of that: that being a real estate agent is actually a dangerous profession? I didn't until I got to know an agent well and they started telling me the horror stories of what they have to go through and put up with.
You do realize that all the salesman in that movie were scammers right?
One scene that stuck in my memory -- SPOILER ALERT -- was when one of the agents, who desperately needed to sell because he hadn't been able to sell in a long time and his job depended on it, finally thought he sold a home to a couple he had spent all this time and effort on, only to find out they have no money and just like talking to agents.
That actually happens. People will just waste a ton of real estate agents' time, with absolutely no intention to buy.
Real estate agents just get constantly jerked around, lied to, and cheated. That's just a fact of life for a real estate agent. I would never in a million years want to be one because of how constantly you get screwed -- and don't even get paid for your effort.
As for exclusivity contracts: agents don't just impose those on clients. The client can sell the home themselves if they want, it's called "for sale by owner". But if they want an agent to represent them, then yeah, the agent will act as their representative. Why shouldn't an agent get paid for their time when they act as the seller's representative -- even if the house doesn't sell?
It just boggles my mind how much free work agents do.
But if you've hired an agent, why wouldn't you pay for their time?
While you're window shopping, they drive you around (or at least drive to the homes with you in their own car, paying for the car, maintenance, gas and insurance), they give you their advice on the homes and neighborhoods you see, answer questions about the home, about how the sale will go or any other questions you have about real estate, giving you the benefit of their years of experience in the industry.
They take time out of their life to give you rather than being with their families, or with clients who are actually serious about buying.
I honestly don't understand how someone could take all that from others without trying to compensate them for all they've given you.
You really need to watch the movie again. Their entire operation is based on high-pressure sales. True hackers.
I personally know very well one of these latter types, and just feel really bad for them because of how much shit they have to put up with, how much work they have to do for free, and because it's a really tough business to succeed in if you're honest.
Perhaps a better system would be a base fee + (lower) commission, and commission based on concrete sales target rather than market value...
That way even if the client backs out, at least the agent hasn't completely wasted their time, effort, and money for absolutely nothing.
I don't see why a commission should be limited, however. If you're great at your job and have a track record of selling homes home for more or buying homes for less than other agents can, why shouldn't you be allowed to charge more?
Even now, some agents (if they're desperate or just starting out in the field) will negotiate away part of their commission. So a lower commission is always an option too.
I'm not sure how either of those address what I was responding too, though. If you are (as an agent) doing all the legwork in the hopes of getting paid on close, it's risky. Some form of industry standard way for agents to get paid a bit for this work I thing would improve it for everyone, but ymmv.
First, I agree that the fees charged are exorbitant. However, for many smaller realtors, they may not have much inventory at any given time. So, just like a freelance programmer, the buyer is paying for their work and for their downtime between jobs.
That's $300/hr. Similar to what lawyers ask.
Although, I suspect that a lot more education is required to become a lawyer than a real estate agent.
Don't get me wrong, I really liked her and she did a great job, but I'm not sure she did $9K great...
Probably 10-20 hours of work in total.
Do agents carry the same (legal) responsibility as lawyers / doctors though?
My experience: the one time she actually had to facilitate a showing of the house, the alarm system got set off. And when the buyers asked to change the closing date (after plane tickets were bought), she agreed and told us we had no choice. The attorney set them all straight.
A realtor's primary skill seems to be getting you to sign the listing contract.
> It blows my mind that the fees are percentage based. The amount of work required for an agent on a 100K house is very similar to that of a 2 Mill house.
Negotiating a $100,000 purchase or sale is an order of magnitude less lower stakes than negotiating a $2,000,000 purchase or sale. If you're a real estate agent and you're able to negotiate 5% up or down on the final sale price on a $2,000,000 house, that's equivalent to the entire value of the $100,000 house. It's not the same job. You could make the exact same argument about salesmen who are paid commission (which is almost exactly the same job as a seller's agent).
> but for both the seller and buyer agents, the number of deals done far outweighs slight incremental selling prices
There's definitely a bias for getting a deal done from the agent's perspective--moreso than for other sales or procurement agents because closing deals unblocks deal flow. I think this gets balanced out by the principals (buyers and sellers themselves) having final say on whether to extend or accept an offer.
To make the same for a house, the seller should say "this is how much I want" and then the agent gets to keep say 50% of whatever they get over that price. Then the incentives are aligned.
The buyer in most cases (there are exceptions) probably can't get a loan with a LTV ratio higher than some number less than or equal to 1 times the appraisal value (.8 typically for a conventional, first mortgage alone), but can generally put as much of their own money into a purchase as they want.
If you have good credit you can still get 100% LTV loans. Heck you only have to have a 600 credit score and not have had a foreclosure in 3 years to get a government back FHA loan with 3.5% down.
There are plenty of people who did “strategic defaults” on multiple properties after 2008, rented for three years and got an FHA loan for a new mortgage (ask me how I know).
The seller would have to offer enough wiggle room that the agent wants to take on the risk. Combined with a flat fee, the system would guarantee income for the agent and also align the incentives.
Or literally the sale of any other item in the world. Why is a house the only thing where the commission is based on the full price?
That's a garaunteed 60% discount off of you hypothetical 5% that the agent would have negotiated.
This is an immediate and unpreventable conflict of interest that impacts the realtor's fiduciary responsibility to act in the principal's interest.
It's true that a realtor might favor a slightly lower price for a faster sale but I don't get your numbers.
First week gets a 10% low offer of $1,800,000. If sale completes, that's $54,000 income for the realtor (.03*1800000). Or, could hold out for a better offer after for some months of additional work to hopefully get an offer for the full $2M, and the realtor just gets $6,000 more - or $0 if no sale. Seller holding out would get $200,000 more, or if no sale, still has the house.
Realtor's personal interest is to maximize return on invested work - take an early offer and go on to the next sale, even if it is low. Seller's best interest is probably to hold out for a bit better deal.
There aren't that many $10,000,000 houses. You can't just dump a $10,000,000 house ASAP and list another $10,000,000 house next week. And at $10,000,000, every percentage point in sale price is worth a marginal $3000 to the sellers' agent. If someone comes in 10% below listing on a $10MM house, the difference alone is equivalent to the sellers' agent commission on an entire $1,000,000 house.
I'm as suspicious of realtors as anybody, but this scenario here includes a real asshole as a seller. If she doesn't want to sell her house, she shouldn't waste everybody's time by putting it on the market. This sort of "just testing the market" shenanigan raises costs for everyone.
I personally try and be a polite person, but I'm not $200K polite.
https://www.bankrate.com/finance/real-estate/real-estate-age...
Levitt and Dubner found that, on average, self-listed homes stay on the market an extra 10 days, prompting the authors to hypothesize that agents might be a little more aggressive about their own homes because a 3 percent fluctuation makes a fair difference on the total sale price, but not that much of a difference when it comes to the commission.
Your link identifies the only actual service that realtors provide: objectivity. Houses are worth what buyers will pay for them. The realtor who can predict what price a house will fetch in the near term is providing a service. Permanent realtor's signs indicate failures of objectivity.
For selling our prior house, I think our seller's agent actually performed some services. She ran the open house, gave us great advice on pricing in our town (5 square miles, she's been selling for 30 years), and -most importantly- gave a buffer in communication with the buyer. Should any issues arise, there's no direct communication with the buyer AND it also helped us be dispassionate when choosing among our various offers.
I see things about strategies like this, and then seriously question whether I feel agents in general have enough integrity to warrant leaving me out of the communication process as you propose.
In our last homebuying experience, we lost two houses to other buyers. In both cases, our offer was higher than the closing price by 5-10% BUT our buyer's agent was from a different agency than the sellers. In both of those cases, the people who got the house were represented by someone from the same agency as the seller.
But spending all your time finding clients isn't actually useful work in helping transactions happen, so it's less and less efficient as the home values go up.
At least that's what I've observed from a distance.
If the agent charged a flat fee -- the agent doesn't have incentive to negotiate a higher price.
The reasoning they gave was that the difference in the realtor's percentage between a lower total price and a higher total price was not meaningful enough for them to do extra work or take extra time to get it. It is better for them to sell more houses for less, rather than fewer houses for more.
So yeah, the percent means the incentives are more aligned, but maybe not aligned enough.
Real estate agents are more likely to plan sufficient time to maximize sale value; most people make plans with timelines where sale (or purchase; I bet you’ll find a similar issue on the other side, too) of the house is a blocker for other things before talking to an agent, so the disruption of not completing the transaction timely is significant.
It was a bit more subtle than that.
Given a fixed percentage (let's take the 6%), if the agent sells today the house (valued 100,000-120,000 US$) he/she gets US$ 6,000 today.
If the 100,000 offer is refused the house stays on the market for - say - 3 months more, and eventually is sold at 110,000 US$) the agents gets only US$ 600 more (and three months later), but has to arrange many more visits, so the formula is incentivating "quick sales" and the agent has all the interest to counsel the seller to accept a "low offer".
The proposal by the freakanomics authors was to increase the percentage due to the agent on the sums exceeding the "base value" of the property, so that the convenience would be shifted to "sell the house at the highest reasonable price in a reasonable time".
Edit: There's a similar issue with recruiters.
You might find this study[1] interesting:
>Our central finding is that, when listings are not tied to brokerage services, a seller's use of a broker reduces the selling price of the typical home by 5.9 to 7.7 percent, which indicates that agency costs exceed the advantages of brokers' knowledge and expertise by a wide margin.
Time is money and the faster they close on your house the faster they can start selling the next one.
Of course this will never actually happen due to the racket currently going on as described in the lawsuit. Why would they agree to this structure when they can already skim 6% off the home price just buy submitting some photos to MLS and opening up doors and closets for people for a few weeks.
Plug: a friend and I created listingrates, a way for consumers to learn about these new models and compare fees.
[1] https://www.listingrates.com/blog/selling-your-home-in-the-2... https://www.listingrates.com/search?q=Flat%20fee
Liability, and the odds of litigation, are vastly higher are bigger dollar amounts. My personal experience with realtors has been pretty much useless. But a bigger asset takes more resources to present and has a lower hit rate given the smaller pool of buyers. There are also unique lending problems that expensive assets run into.
Moreover, it is likely more work to sell a $2mil home, because there are proportionately fewer buyers, which means more work in sourcing buyers, more work in retaining interest, etc.
This comment is written by someone who's never sold a home. In general, it's very easy to look at someone else's job and say 'that person basically does nothing!'. I mean, half the time I look at software engineers sitting their typing and I think to myself "I could do that!".
Plus, if you're selling a $2million home, you can afford $120k.
Given the point I'm curious now of how many individual realtors take the blame in a sale after the fact? It is generally the seller who's on the hook and is directly sued from what I've seen. Maybe this is incorrect but it's rarely the middle man stepping in to take the bullet.
In fact I have a personal example where an agency did not do due diligence on behalf of me and shifted the blame to me leaving me holding the bag of potentially being out 5 figures in a botched purchase. Not until I threatened to take legal action against both agencies (never sign arbitration BTW) did both of then come to the plate to decide on how to avoid that as both agencies had points of blame.
Regardless, even though the realtors were to blame neither of them seemed concerned and ultimately the claim was handled by the agencies at a higher level than the individuals to blame.
There is an argument of diminishing return on the value of realtors however I wouldn't paint it with such a broad stroke. That being said I do believe it's s scam that realtors in a legacy mindset are offended when negotiating their rate comes up - regardless of their work put into the sale of the home. Many flat out will not even hear the argument and seem entitled to it while being unable to defend the rationalization of.
Yes, the seller is the party responsible. However, if he hired an agent and was relying on the agent's advice, the seller can sue the agent. That is the difference between hiring an agent and doing it yourself. You are basically paying the brokerage to insure you against sticking your foot in your mouth, and the brokerage -- to limit their liability in the first place -- gives you an agent who tells you how not to screw yourself.
As you yourself said, once you threatened to sue, the agencies started getting stuff done. That's the point. If you didn't use them, you would have no one to shift the blame to.
> That being said I do believe it's s scam that realtors in a legacy mindset are offended when negotiating their rate comes up - regardless of their work put into the sale of the home
As someone who believes in the free market, I of course do not object to wanting to negotiate rates, but if no agent is willing to do it, well then, they're just charging what the market will bear. You are, of course, free to sell your home and take on the liability yourself.
This is exactly why I've sold my homes FSBO with an actual real estate lawyer. Real estate agents are rarely lawyers and their training sometimes seems to give them the idea they are legal experts - they are not. The point I was making was that the agents both made mistakes and neither were held accountable. The reason the agencies stepped in was to fix the mistakes (legal mistakes) that were made. There are other ways to sell a house that do not require an agent that do protect you as a seller (or a buyer). I don't use agents anymore because of this and I've had nothing but a more positive experience given that the information from the buy side is much more accessible, and cheaper. I know what I'm looking for and I'm well capable of setting up searches to find that. Realty agencies know this and are trying to protect their vested interest by playing new games like "premarket" opportunities. I don't see how they're progressing the experience, but are only making moves to protect a legacy model. Very similar to how ridesharing has been, overall, positive disruption.
I would rather pay an RE agent by the hour to show me houses than this percentage nonsense. Zillow/Google street view helps to drop most of the false positives, and the agent can help me focus on real candidates.
The average person would take minimum a year to go from no-skills to an actually useful independent engineer. I could literally take a crack at selling a house after a week of training and probably do alright.
My father was an agent, so I'm obviously biased. However, thinking that 'selling a home' is all there is to being an agent is incredibly naive. It is a professional certification, where you have to be knowledgeable about the laws of the state you operate in, because they control your business.
Compared to the regulatory environment of real estate, software is a dream. You pay the realtor for having passed a test saying that he/she is capable of representing you in accordance with the law.
Also, you probably would not be able to sell a home. Sales is a skill unto itself. Only non-salespeople think it's easy. Having seen what my dad would have to do, I noped out of sales real quick. Engineering is way easier.
> I have never had someone who has not done programming before, watch me typing into a terminal and say it looks easy
I should introduce you to my mother.
85% of realtors drop out of the industry within 18 months. My impression is that this is because "becoming a realtor" is very easy.
A counterpoint might be that it's because being a _good_ realtor is hard, and I believe that that is true to some extent. But that means you aren't _really_ paying someone "for having passed a test saying that he/she is capable of representing you in accordance with the law", because the licensing burden is really small. For instance, it's much smaller than the licensing burden you need to start cutting peoples hair.
Do you honestly disagree that the barrier to entry to being a practicing real estate agent is low? Doesn't mean it isn't hard to be a _successful_ one, but the basic barrier to entry just doesn't seem that high.
I might not be good at real estate, but I bet in a weeks time I could do a passable job filling out necessary documents and doing open houses.
There is no reality where someone who has no programming experience is anything other than a huge liability if you give them a week of training and then assign a feature to them and tell them to start coding, testing, and making pull requests for it.